“The dilemma for central banks is that unemployment remains low, headline inflation is falling, but core inflation is not. Now one would expect core inflation to also start falling, but can central banks wait that long?”
Additionally, Miller believes that once the full impact of rate increases on the wider economy begins to be felt in the spring, central banks will start to think about cutting rates in the second half of 2023
Jobs done?
Jeremy Lawson, chief economist at Abrdn, says that core inflation — which is the measure of inflation that strips out volatile items such as energy and food — remains high and in his view this inflation will not fall until unemployment rises.
He also believes that central banks “will do what it takes” to get core inflation down, even if that means tolerating much higher unemployment for a prolonged period of time.
Meanwhile, Tiffany Wilding (pictured), North American economist at Pimco, says interest rates in the developed world have “probably” already reached a level where the result is demand being hit.
She says: “Overall, central banks have already largely realigned market pricing with the need for restrictive policy and have achieved this relatively quickly, with little additional market stress or contagion. While we expect central banks to continue to hike for the next quarter or so before holding policy in restrictive territory, the trade-off they face will eventually change.”
Wilding adds: “Today, with low unemployment and elevated inflation, restrictive policy is needed. As 2023 progresses, inflation moderates and unemployment rises, the need for restrictive policy will get less clear.
“Since the US appears to be leading inflationary trends, and inflation could fall faster in the US than elsewhere, the Fed may be the first central bank to discuss cutting rates in the second half of 2023.”
From an investment perspective, Blackbourn is focused on buying government bonds as he expects the price of those to rise as recessions take hold.
In contrast, many investors have reacted to recent inflation data by buying equities in anticipation of rates being cut.
But it it looking like it is in the the second half of 2023 when the answer will be revealed, which will have a major impact on the lives of advisers and their clients in the coming years.
